आर्थिक शब्दावली और अवधारणाएँ

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Economic Terms & Concepts

The Hook: A Note That Became Worthless Overnight

On 8 November 2016, at 8 PM, ₹500 and ₹1000 notes — nearly 86% of India's currency in circulation — stopped being legal tender. In one speech, words like *legal tender*, *liquidity*, *money supply* and *black money* jumped out of textbooks and into every Indian household. That is the power of economic vocabulary: it is not abstract theory, it is the language in which a country's biggest decisions are announced. And that is exactly why examiners love this chapter — one confused term (say, GDP vs GNP, or repo vs reverse repo) is enough to turn a sure mark into a negative one.

Learning Objectives

By the end of this chapter you will be able to:

• Define and distinguish the 40+ economic terms most frequently asked in SSC CGL, IBPS PO/Clerk, and State PCS prelims.
• Spot the classic traps: near-identical pairs (inflation/deflation, fiscal/monetary, devaluation/depreciation).
• Connect static terms to institutions (RBI, NITI Aayog, IMF, World Bank) and to the Budget.
• Answer statement-based questions where one wrong word makes a statement false.

1. National Income: The Big Family

GDP — Gross Domestic Product

The total money value of all final goods and services produced within the domestic territory of a country in a year. "Final" matters — the value of wheat is not counted separately if the bread's value is already counted (avoids double counting).

GNP — Gross National Product

GNP = GDP + Net Factor Income from Abroad (NFIA) — i.e., income earned by Indians abroad minus income earned by foreigners in India.

NNP, and the "at factor cost / market price" ladder

• NNP = GNP − Depreciation (wear and tear of capital; also called Capital Consumption Allowance).
• Market Price → Factor Cost: subtract Net Indirect Taxes (indirect taxes − subsidies).
• National Income = NNP at Factor Cost.

Which measure does India use as the headline?

Until 2015, India's headline growth measure was NNP at factor cost (national income). With the new series (base year 2011–12) introduced in 2015, GDP at market prices became the headline indicator, in line with international practice.

Real vs Nominal GDP

• Nominal GDP: measured at current prices — includes inflation.
• Real GDP: measured at constant (base-year) prices — shows true growth.
• GDP Deflator = (Nominal GDP ÷ Real GDP) × 100 — a measure of price rise.

Who measures it in India?

The National Statistical Office (NSO), under the Ministry of Statistics and Programme Implementation (MoSPI). The current base year for GDP is 2011–12. GDP is now measured by GVA (Gross Value Added) at basic prices plus product taxes minus subsidies.

🧠 Active Recall: Write from memory: (1) GNP − GDP = ? (2) What is subtracted to go from market price to factor cost? (3) India's GDP base year?

2. Inflation and Its Family

Inflation = sustained rise in the general price level, i.e., fall in the purchasing power of money.

Types by speed

• Creeping (mild, ~2–3%), Walking/Trotting, Running, Galloping/Hyperinflation (prices rising extremely fast — e.g., Germany 1923, Zimbabwe 2008).

Types by cause

• Demand-pull inflation: too much money chasing too few goods.
• Cost-push inflation: rise in input costs (wages, oil, raw material).
• Stagflation: stagnation + inflation — high inflation with high unemployment and low growth. The hardest to cure.
• Deflation: sustained fall in prices (worse than mild inflation — signals weak demand).
• Disinflation: fall in the *rate* of inflation (prices still rising, but slower). Trap word!
• Reflation: deliberate policy to expand output by stimulating demand.
• Core inflation: inflation excluding food and fuel (volatile items).

How it is measured in India

• CPI (Consumer Price Index) — measures retail prices; the RBI's inflation target is based on CPI (Combined): 4% ± 2% (i.e., 2%–6% band) under the inflation-targeting framework.
• WPI (Wholesale Price Index) — wholesale prices; base year 2011–12; does not include services.
• CPI is released by NSO; WPI by the Office of the Economic Adviser, Ministry of Commerce & Industry.

🧠 Active Recall: Which index excludes services? What is the RBI's CPI target band? Differentiate deflation and disinflation in one line each.

3. Money and Banking Terms

Money supply measures (RBI)

• M1 = Currency with public + Demand deposits + Other deposits with RBI (most liquid; "narrow money").
• M2 = M1 + Savings deposits of post office savings banks.
• M3 = M1 + Time deposits with banks ("broad money" — the most commonly used aggregate).
• M4 = M3 + All post office deposits.

Key RBI instruments

• Repo Rate: rate at which RBI lends short-term funds to banks against securities. ↑ Repo = costlier loans = less money in the economy.
• Reverse Repo: rate at which RBI borrows from banks (absorbs liquidity). Always lower than repo.
• CRR (Cash Reserve Ratio): % of a bank's deposits kept with RBI in cash — earns no interest.
• SLR (Statutory Liquidity Ratio): % of deposits kept by the bank with itself in liquid assets (cash, gold, approved securities).
• Bank Rate: long-term lending rate of RBI; aligned with the MSF (Marginal Standing Facility) rate, which is repo + a fixed margin.
• Open Market Operations (OMO): buying/selling government securities to manage liquidity.
• MPC (Monetary Policy Committee): 6 members (3 RBI + 3 government-nominated), headed by the RBI Governor; decides the repo rate; meets at least 4 times a year.

Other banking terms

• NPA (Non-Performing Asset): a loan on which interest/principal is overdue for more than 90 days.
• Priority Sector Lending (PSL): 40% of Adjusted Net Bank Credit for domestic scheduled commercial banks.
• Legal tender: money that must be accepted by law (notes/coins issued under RBI Act/Government of India).
• Liquidity trap: when interest rates are so low that monetary policy stops working (people hoard cash).

🧠 Active Recall: Which is higher — repo or reverse repo? What does a CRR hike do to money supply? Define NPA in one line.

4. Budget and Fiscal Terms

• Fiscal policy: government's taxation and spending policy (Budget). Monetary policy: RBI's control of money supply and interest rates. Do not mix them up — the examiner's favourite trap.
• Revenue deficit = Revenue expenditure − Revenue receipts.
• Fiscal deficit = Total expenditure − Total receipts excluding borrowings = the government's total borrowing requirement.
• Primary deficit = Fiscal deficit − Interest payments.
• Effective revenue deficit = Revenue deficit − Grants for creation of capital assets.
• Direct tax: burden cannot be shifted (Income tax, Corporation tax). Indirect tax: burden can be shifted (GST, customs duty).
• GST: introduced 1 July 2017 via the 101st Constitutional Amendment Act, 2016; a destination-based, indirect tax; GST Council is a constitutional body (Article 279A) chaired by the Union Finance Minister.
• FRBM Act, 2003: targets fiscal discipline — aimed to limit fiscal deficit and eliminate revenue deficit.
• Disinvestment: government selling its stake in PSUs. Strategic disinvestment = transferring management control.
• Crowding out: heavy government borrowing pushes up interest rates and reduces private investment.

🧠 Active Recall: Fiscal deficit minus interest payments = ? GST came via which amendment? Who chairs the GST Council?

5. External Sector Terms

• Balance of Trade (BoT): exports − imports of goods only.
• Balance of Payments (BoP): record of all economic transactions with the rest of the world — has two accounts: Current account (goods, services, income, transfers) and Capital account (FDI, FII/FPI, loans, reserves).
• Devaluation: deliberate lowering of currency value by the government (fixed-rate system). Depreciation: fall in value through market forces (floating system). India devalued the rupee notably in 1966, 1991 (July 1991, in two steps).
• FDI vs FII/FPI: FDI = long-term investment with management interest; FPI = portfolio investment in shares/bonds ("hot money", can exit quickly).
• Forex reserves: held by RBI — include foreign currency assets, gold, SDRs, and reserve position in the IMF.
• SDR (Special Drawing Rights): IMF-created international reserve asset (1969); its value is based on a basket of currencies (US dollar, euro, Chinese yuan, Japanese yen, pound sterling).
• Purchasing Power Parity (PPP): exchange rate that equalises the price of an identical basket of goods across countries.

🧠 Active Recall: BoT covers goods only — true or false? Devaluation vs depreciation — who does what? Name the SDR basket currencies.

6. Growth, Development and Welfare Terms

• Economic growth: rise in output/income (quantitative). Economic development: growth + improvement in living standards, health, education (qualitative).
• HDI (Human Development Index): published by UNDP (since 1990); three dimensions — health (life expectancy), education, standard of living (GNI per capita). Created by Mahbub ul Haq and Amartya Sen.
• Poverty line in India: earlier estimated by the Planning Commission; key committees — Tendulkar Committee (2009) and Rangarajan Committee (2014).
• Gini coefficient: measures income inequality (0 = perfect equality, 1 = perfect inequality). Related: Lorenz curve.
• Phillips curve: inverse relationship between inflation and unemployment (short run).
• Laffer curve: beyond a point, higher tax rates reduce tax revenue.
• Trickle-down theory: benefits of growth at the top eventually reach the poor.
• Inclusive growth: growth whose benefits reach all sections — a stated goal of Indian planning since the 11th/12th Five-Year Plans.
• Green GDP: GDP adjusted for environmental degradation.

7. Institutions and Reports (Static Anchors)

8. Classic Economic Thinkers & Terms (Quick Hits)

• Adam Smith — "Wealth of Nations" (1776); *invisible hand*; father of modern economics.
• John Maynard Keynes — "General Theory" (1936); demand management; deficit spending in depression.
• Amartya Sen — Nobel 1998; capability approach; welfare economics.
• Abhijit Banerjee — Nobel 2019 (with Esther Duflo and Michael Kremer); randomised controlled trials for poverty alleviation.
• Dadabhai Naoroji — "Drain of Wealth" theory; first to estimate India's national income.
• V.K.R.V. Rao — pioneering scientific estimate of India's national income.

🧠 Active Recall: Who gave the "invisible hand"? Which Indian won the Economics Nobel in 1998? Who first estimated India's national income?

🧩 Mnemonics

1. Money supply ladder — "CDT" for M1: Currency with public + Demand deposits + oTher deposits with RBI. Then remember: M3 = M1 + Time deposits ("M3 has Time").

2. Repo vs Reverse Repo — "Repo Pours, Reverse Removes": Repo pours money into banks (RBI lends); Reverse repo removes money (RBI borrows/absorbs).

3. Budget deficits — "R-F-P, each subtracts more": Revenue deficit (revenue gap) → Fiscal deficit (total borrowing) → Primary deficit (fiscal minus interest). Remember: *"Real Fiscal Problems"*.

4. HDI dimensions — "HEL": Health, Education, Living standard.

🔗 Static-Dynamic Link

Static terms keep re-entering the news: the repo rate changes at every MPC meeting; CPI inflation is reported monthly; the fiscal deficit number is announced in every Union Budget (1 February); and GDP growth figures are released quarterly by NSO. When you read a headline like "RBI holds repo rate" or "fiscal deficit target revised", map it instantly to the definitions above — that habit converts current affairs into free revision of this static chapter.

🌐 Linguistic Bridge (Hindi ↔ English)

Note the trap pair: devaluation = अवमूल्यन (deliberate), depreciation = मूल्यह्रास (market-driven) — Hindi translations often blur these.

⚠️ Caution: Examiner's Trap

Trap 1 — "लगभग सही कथन" (Almost-true statement): "WPI includes services along with goods." Sounds plausible, but WPI covers goods only — services are in CPI. Similarly: "Reverse repo is higher than repo" — always false; reverse repo is lower.

Trap 2 — "विपरीत कार्य-कारण" (Reverse causation): "A rise in repo rate increases money supply in the economy." Wrong direction — a repo hike makes borrowing costlier and contracts money supply. Examiners flip the direction of CRR/SLR/repo effects to catch rote learners.

Trap 3 — "समान नाम/वर्ष" (Similar names/years): Devaluation vs depreciation; disinflation vs deflation; GDP vs GNP; fiscal vs monetary policy; Planning Commission (1950) vs NITI Aayog (2015). Also: RBI established 1935, nationalised 1949 — the two years are routinely swapped in options.

Trap 4 — "नकारात्मक वाक्यांश" (Hidden negative): "Which of the following is NOT a direct tax?" — GST is the answer, but in a hurry candidates pick income tax. Underline NOT/EXCEPT before reading options.

📋 High-Yield Facts Table

📅 Revision Planner

• After 2 days: Blurt-test yourself — blank page, write all formulas (GNP, NNP, fiscal/primary/revenue deficit), all four money-supply measures, and the repo-family definitions. Check against the chapter; mark what you missed.
• Weekly: Re-do the High-Yield Facts Table from memory; re-read the Examiner's Trap box; solve 25 fresh MCQs mixing inflation, banking and budget terms.
• Monthly (blurting): In 10 minutes, write the full chapter skeleton — National Income → Inflation → Banking → Budget → External Sector → Development → Institutions — with two facts under each head. Any head where you stall is your next revision target.

Review after 2 days — do not skip the first blurt; that single session fixes most of this chapter in long-term memory.